Appendix — Levy v. Southbrook International Investments, Ltd.

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UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

August Term, 2000

(Argued: December 14, 2000)

(Decided: August 23, 2001)

Docket No. 00-7630

MARK LEVY, Derivatively on behalf of Immunogen Inc.,

Plaintiff-Appellant,

v.

SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.

Defendant-Appellee.

— and —

IMMUNOGEN, INC.,

Nominal-Defendant-Appellee.

BEFORE: FEINBERG, PARKER, Circuit Judges,

and COVELLO, District Judge.”

In this shareholder derivative suit claiming disgorgement of

short swing profits, plaintiff-appellant appeals from an opinion

and order of the District Court for the Southern District of

New York, (Buchwald,.J.), entered on May 15, 2000, granting

the defendant’s motion to dismiss the complaint pursuant to

Fed. R. Civ. P. 12(b)(6).

AFFIRMED.

* The Honorable Alfred V. Covello, Chief Judge of the United States Dis-

trict Court for the District of Connecticut, sitting by designation.

A-2

Jeffrey S. Abraham, Law Office of Jeffrey S. Abraham,

New York, NY, for Appellant.

Herbert Teitelbaum, Peter Sapanoff, Noah Weissman,

Robinson Silverman Pearce Aronsohn & Berman LLP, New

York, NY, for Appellee.

Allan A. Capute, Eric Summergrad, Meyer Eisenberg,

David M. Becker, General Counsel, for the Securities and

Exchange Commission, Amicus Curiae.

PARKER, Circuit Judge:

Plaintiff-appellant, Mark Levy (“Levy”), is a shareholder of

ImmunoGen, Inc (“ImmunoGen”). He brings this shareholder

derivative action alleging that defendant, Southbrook Inter-

national Investment, Ltd. (“Southbrook”), by virtue of its

ownership of ImmunoGen convertible preferred shares, is a

more than 10% beneficial owner of ImmunoGen common

stock and realized short swing profits through the purchase

and sale of ImmunoGen stock within a six month period.

Plaintiff-appellant seeks disgorgement of Southbrook’s profits

as required by Section 16(b) of the Securities and Exchange

Act of 1934 as amended, 15 U.S.C. § 78p(b) (“the Exchange

Act”).

Article III, Paragraph 3.10 (“the conversion cap”) of the

Convertible Preferred Stock Purchase Agreement between

ImmunoGen and Southbrook (“the Agreement”) provides

that Southbrook may not convert shares to the extent that

such conversion would result in Southbrook owning more

than 4.9% of ImmunoGen’s outstanding common stock.

There is no claim that Southbrook ever exceeded the con-

version cap. Rather, plaintiff-appellant claims that due to

Southbrook’s ability to make limited conversions and sales

over a sixty-day period it could have cumulatively owned

more than 10% of ImmunoGen’s common stock within the

meaning of 17 C.F.R. § 240.13d-3(a) and 13d-3(d)(1)(i)

(“Rules 13d-3(a) and 13d-3(d)(1)(i),” respectively). Therefore,

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according to plaintiff-appellant, Southbrook is a more than

10% beneficial owner within the meaning of Section 16(b)

and subject to Section 16(b) short-swing trading liability.

In the alternative, plaintiff-appellant contends that: (1) the

Agreement is void as a “sham transaction”; (2) the conversion

limitation provision is void pursuant to 17 C.F.R. § 240.13d-

3b (“Rule 13d-3(b)”);' and (3) the conversion limitation con-

stitutes a waiver of section 16(b), and therefore is void pursuant

to Section 29(a) of the Exchange Act as amended, 15 U.S.C.

§ 78cc(a).?

Southbrook counters that, because the conversion cap pre-

vents Southbrook from owning, at any one point, more than

4.9% of ImmunoGen’s common stock, Southbrook is not a

more than 10% beneficial owner within the meaning of Rules

13d-3(a) and 13d-3(d)(1)(i), and consequently, is not subject

to Section 16(b) short-swing trading liability. Additionally,

according to Southbrook, because the conversion cap is valid

and binding, plaintiff-appellant’s alternative grounds for

relief are inapplicable.

We conclude that where a binding conversion cap denies

an investor the right to acquire more than 10% of the under-

' Rule 13d-3(b) reads as follows:

Any person who, directly or indirectly, creates or uses a trust, proxy,

power of attommey, pooling arrangement or any other contract, ar-

rangement, o: device with the purpose of [sic] effect of divesting

* 15 U.S.C. § 78cc(a) reads as follows: “Any condition, stipulation, or pro-

vision binding any person to waive compliance with any provision of this

chapter or of any rule or regulation thereunder, or of any rule of an ex.

change required thereby shall be void.” 15 U.S.C. § 78cc(a).

A-4

lying equity securities of an issuer, at any one time, the in-

vestor is not, by virtue of his or her ownership of convertible

securities, the beneficial owner of more than 10% of those

equity securities within the meaning of Rules 13d-3(a) and

13d-3(d)(1){i). We further find that the conversion cap in this

case is binding, and accordingly, affirm the decision of the

district court.

I. BACKGROUND

The allegations in the complaint disclose the following. On

October 16, 1996 Southbrook and ImmunoGen entered into

the Agreement. Pursuant to the agreement Southbrook agreed

to purchase Immunogen convertible preferred stock. The

Agreement limits Southbrook’s ability to convert the pre-

ferred stock to the extent that such conversion would result in

Southbrook owning more than 4.9% of the common stock, at

any one time. The conversion cap in part reads as follows:

3.10 Purchaser Ownership of Common Stock. The Pur-

chaser may not use its ability to convert Shares hereunder

or under the terms of the Vote Certificates or to exercise

its right to acquire shares of common stock under the

Warrants to the extent that such conversion or exercise

would result in the Purchaser owning more than 4.9% of

the outstanding shares of the Common Stock.

Joint App. at 36 (Convertible Preferred Stock Purchase Agree-

ment, ¥ 3.10).

Plaintiff-appellant alleges that by February 21, 1997, South-

brook was a more than 10% beneficial owner of ImmunoGen’s

outstanding common stock by virtue of Southbrook’s owner-

ship of ImmunoGen convertible preferred stock. The complaint

further alleges that between January 1 and February 4, 1997,

Southbrook acquired ImmunoGen common shares through

conversion and sold them presumably at a profit. Southbrook

allegedly repeated this process between January 27 and Au-

gust 4, 1997, and again in October 1997.

aT LT AIT CET ee Ne ee Te

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On December 28, 1998, plaintiff-appellant demanded that

ImmunoGen’s Board of Directors bring an action to cause

Southbrook to disgorge its alleged, short swing profits. See

Levy v. Southbrook International Investments, Ltd., No. 99

Civ. 1480 NRB, 2000 WL 567008, at *2 (S.D.N.Y. May 10,

2000). By letter dated February 18, 1999, the Board refused,

and this suit followed. See id.

Plaintiff-appellant, Mark Levy, derivatively on behalf of

ImmunoGen, brought this action for disgorgement pursuant

to Section 16(b) of the Exchange Act, claiming that South-

brook improperly profited from its investment in ImmunoGen

because it was a more than 10% beneficial owner of Immuno-

Gen’s common stock. See id. at *1. Southbrook filed a motion

to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), for failure to

State a claim, on the ground that the conversion Cap prevented

it from being a more than 10% beneficial owner of Immuno-

Gen common stock. See id. Southbrook’s motion to dismiss

was accompanied by an affidavit and copies of various docu-

ments referred to in the complaint.’

The district court, in a written opinion, granted Southbrook’s

motion to dismiss. See id. It found plaintiff-appellant’s bene-

ficial ownership argument inconsistent with precedent in this

Circuit. See id. (citing Levner v. Saud, 903 F. Supp. 452

(S.D.N.Y. 1994), aff'd, Levner v. Prince Alwaleed, 61 F.3d 8

(2d Cir. 1995)). Additionally, the district court concluded that

“jt is clear that only those holders of derivative securities,

who could acquire ownership, by conversion or otherwise,

* We note that it was appropriate for the district court to refer to the docu-

ments attached to the motion to dismiss since the documents were referred

to in the complaint. See Yak v. Bank Brussels Lambert, BBL (USA) Hold-

ings Inc., 252 F.3d 127, 130 (2d Cir. 2001) (“On a motion to dismiss, the

court may consider any written instrument attached to [the complaint]

as an exhibit or any statements or documents incorporated in it by refer-

ence.”) (citation and internal question marks omitted).

\

A-6

of more than 10% of the common stock, at one time, are sub-

ject to § 16(b) liability.” Jd. at *10 (emphasis in original).

Finally, in response to plaintiff-appellant’s alternative

grounds for relief, the district court held that: (1) because

conversion caps are legitimate the sham transaction doctrine

was inapplicable; (2) since there was no plan or scheme to

evade, and the plaintiff did not allege such in his complaint,

the conversion cap was not void pursuant to Rule 13d-3(b);

and (3) Section 29(a) applied only to express waivers of non-

compliance, and there was no such waiver here. See id. at *4-

5.

Plaintiff-appellant filed a timely notice of appeal on May 17,

2000. On appeal, he challenges the district court’s grounds for

dismissing his complaint. After hearing oral argument in this

case on December 14, 2000, the panel requested and received

an amicus curiae brief from the Securities and Exchange Com-

mission which provided support for defendant-appellee’s posi-

tion.

II. DISCUSSION

This Court has jurisdiction pursuant to 28 U.S.C. § 1291.

We review a district court’s dismissal of a complaint pur-

suant to Fed. R. Civ. P. 12(b)(6) de novo. See Feder v. Frost,

220 F.3d 29, 32 (2d Cir. 2000). Issues of statutory interpre-

tation are also reviewed de novo. See United States v. Proyect,

989 F.2d 84, 87 (2d Cir. 1993). Although on a motion to dis-

miss a court must accept all factual allegations as true and draw

all inferences in the plaintiff's favor, see Sheppard v. Beer-

man, 18 F.3d 147, 150 (2d Cir. 1994), dismissal is appropriate

if the plaintiff can prove no set of facts that would entitle him

to relief. See Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir.

1998).

Additionally, this Court is “bound by the SEC’s interpre-

tations of its regulations in its amicus briefs, unless they are

plainly erroneous or inconsistent with the regulations,” Press

ies ee Re

A-7

v. Quick & Reilly, Inc., 218 F.3d 121, 128 (2d Cir. 2000) (cita-

tion and internal quotation marks omitted).

Section 16(b) of the Exchange Act compels corporate in-

siders to disgorge profits earned on purchases and sales of

securities made within six months of each other. See Secur-

ities and Exchange Act of 1934 § 16(b), 15 U.S.C. § 78p(b).

“Liability under § 16(b) does not attach unless the plaintiff

proves that there was (1) a purchase and (2) a sale of securities

(3) by an officer or director of the issuer or by a shareholder

who owns more than 10% of any one class of the issuer’s se-

curities (4) within a six month period.” Gwozdzinsky v. Zell/

Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998) (em-

phasis added). In other words, only officers, directors, and

persons who beneficially own more than 10% of an issuer’s

common stock are subject to Section 16(b) short swing

trading liability. Inasmuch as Southbrook is neither an officer

nor a director of ImmunoGen, Section 16(b) liability can attach

only if it is a more than 10% beneficial owner. Therefore, the

issue presented is whether Southbrook, despite the existence

of the 4.9% conversion cap, is a more than 10% beneficial

owner of ImmunoGen’s common stock.

A. An Investor Subject to an Effective, Binding Conversion

Cap of 4.9% is Not a More Than 10% Beneficial Owner

of the Underlying Equity Stock

Section 16(b) does not define the term “more than 10%

beneficial owner,” but Rule 16a-1 promulgated thereunder

provides that “for the purposes of determining whether a

person is a beneficial owner of more than 10% of any class of

equity securities ... the term ‘beneficial owner’ shall mean

any person who is deemed a beneficial owner pursuant to Sec-

tion 13(d) of the Act and the rules promulgated thereunder.”

See 17 C.F.R. § 240.16a-1(a)(1). Rule 13d-3, in turn, deter-

mines beneficial ownership. It states:

A-8

(a) For purposes of sections 13(d) and 13(g) of the Act

a beneficial owner of a security includes any person who,

directly or indirectly, through any contract, arrangement,

understanding, relationship, or otherwise has or shares:

(1) Voting power which includes the power to vote, or

to direct the voting of, such security; and/or,

(2) Investment power which includes the power to

dispose, or direct the disposition of, such security.... .

(d) Notwithstanding the provisions of paragraphs (a)

~ and (c) of this rule:

(1)(i) A person shall be deemed to be-the beneficial

owner of a security, subject to the provisions of paragraph

(b) of this rule, if that person has the right to acquire

beneficial ownership of such security, as defined in Rule

13d-3(a) (§ 240.13d-3(a)) within sixty days, including

but not limited to any right to acquire: (a) Through the

exercise of any option, warrant or right; (b) Through the

conversion of a security, . . .

17 CFR. 240 § 13d-3(a) and (d)(1)(i).

As noted earlier, plaintiff-appellant argues that as a conse-

quence of Southbrook’s ability to dispose of more than 10%

of ImmunoGen’s common stock within sixty days through

seriatum conversions and sales, Southbrook cumiulatively had

investment power over, and consequently was the beneficial

owner of, more than 10% of ImmunoGen’s common stock

within the meaning of Rules 13d-3(a) and 13d-3(d)(1)i).

Southbrook responds that beneficial ownership depends on its

right, at a given point rather than cumulatively over a sixty-

day period, to acquire through conversion more than 10% of

ImmunoGen’s common stock.

The SEC’s position, as set forth in its amicus brief to this

Court supports defendant’s reading of the Rule. According to

the SEC, a holder of convertible securities that is subject to a

binding conversion cap is not a more than 10% beneficial

A-9

owner of the underlying equity securities. See Brief of Ami-

cus Curiae the Securities and Exchange Commission (No.

00-7630) at 14. “[T]he powers and rights one has must be

evaluated as of the time of a transaction to determine whether

one is required to file a report under Sections 13(d) and/or

16(a), and whether the transaction is subject to short-swing

profit recovery under Section 16(b).” Jd. at 20 (internal quo-

tation marks omitted).

Pointing out that Rule 13d-3(d)(1)(i) speaks to the “right,”

not the “ability” to acquire, the SEC reasons that the investor’s

“right to acquire” stock is at all times subject to the con-

version cap. See id. at 21. As long as an investor holds the

maximum percentage of common shares allowed pursuant to

the conversion cap, the investor does not have the “right to

acquire” investment power over any of the convertible shares.

See id. at 20-21. Only when the investor divests itself of suf-

ficient shares of common stock to reduce holdings below the

cap does any additional “right to acquire” come into being.

See id. At that point the investor does not have voting power,

investment power, or the “right to acquire” those powers, with

respect to the divested shares. Nor does it have the “right to

acquire” those powers by virtue of its conversion rights because

the cap prohibits conversion so as not to exceed holdings in

excess of 4.9% of the common stock. See id. Accordingly,

the SEC reasons, the calculation of beneficial ownership is

not cumulative. As we mention above, we are bound by the

SEC’s interpretation unless it is clearly erroneous or incon-

sistent with the regulation being interpreted. See Press, 218

F.3d at 128 (citation omitted).

Section 13(d) and the rules promulgated thereunder are re-

porting requirements intended to provide investors with early

warnings of potential changes in control. The SEC brief ex-

plains the application of the Section 13(d) definition of bene-

ficial ownership to short-swing trading cases under Section

16(b). The beneficial ownership threshold established for

| NMI iia

"s A-10

disclosure of shareholder control under Section 13(d) is based

on, at least in part, the power over corporate affairs asso-

ciated with significant equity ownership. This power also

implicates access to inside information and the potential for

insider trading.

Upon adoption of the “within 60 day” language in the Rule

the SEC said, “Rule 13d-3(d)(1)(i) deems a person to be the

beneficial owner of a security if he has the right to acquire

beneficial ownership of such security, at any time within

sixty days, through: . . . (b) conversion of a convertible se-

curity . . .” Filing and Disclosure Requirements Relating to

Beneficial Ownership, Exchange Act Release No. 14692, 14

SEC Docket 862, 1978 WL 14827 at *14 (April 21, 1978).

It is obvious, given the purpose of the Rule, that the phrase

“within sixty days” is intended to apply to the period within

sixty days of a wansaction which triggers the application of

the Rule. The SEC also said that it was

mindful that as the point in time in which the right to

acquire may come to fruition is extended into the future

the relation of the right’s ability to influence control

is correspondingly attenuated. When sixty days or less

are left until the right to acquire may be exercised, the

Commission believes that the ability of the holder of

such right to affect control is sufficient to warrant the

imposition of an obligation to file under Rule 13d-1.

See id. at *15.

This language suggests that the Commission was contem-

plating a time limitation in connection with the right to acquire

the ability to control.

Viewing Rule 13d-3(d)(1)(i) in the context of its purpose,

and operation, we find reasonable the SEC’s reading of the

Rule’s “right to acquire” language. The SEC’s use of “within

sixty days” in Rule 13d-3(d)(1)(i) directs us to look not to

the percentage of common shares cumulatively, beneficially

A-11

owned during a 60 day period as plaintiff-appellant argues,

but rather, to whether the “right to acquire” inures at some

point within sixty days of the acquisition. In short, “within

sixty days” is a timing limit, not a direction to aggregate.

Thus, beneficial ownership is determined at any one time,

not cumulatively. This interpretation is consistent with the

Supreme Court’s instruction that Section 16(b) operate only

within “narrowly drawn limits.” Foremost-McKesson, Inc. v.

Provident Securities Co., 423 U.S. 232, 251 (1976). Moreover,

this interpretation limits Section 16(b) short swing trading

liability to those persons in a Position to influence the value

of stocks because they hold or have the “right to acquire”, at

any one time, more than 10% of the issuer’s common stock.

See Morales v. Freund, 163 F.3d 763, 766 (2d Cir. 1999)

(explaining that the object of 16(b) is to avoid short swing

profits by investors that may be able to influence the value of

stocks in which they trade).

Accordingly, as long as the conversion Cap in this case is

binding, Southbrook cannot be the beneficial owner of more

than 4.9% of ImmunoGen stock. At any one time, it cannot

hold more than that amount of stock because it does not have

the “right to acquire” more than 4.9% of ImmunoGen com-

mon stock “within sixty days” of each divestment. Because

the SEC’s position is neither plainly erroneous nor inconsis-

tent with the regulations and comports with our interpretation,

we adopt it. See Press, 218 F.3d at 128.

We now address plaintiff-appellant’s arguments concerning

the validity of the conversion cap itself.

B. The Conversion Cap in This Case is Valid and Binding

Plaintiff-appellant claims that the conversion cap in Para-

graph 3.10 of the Agreement is not valid and binding because

(1) it does not actually bind the purchaser to maintain an

equity holding below the 4.9% threshold and thus is void as a

Sham transaction; 2) the conversion limitation provision is

A-12

void pursuant to Rule 13d-3(b); and 3) the conversion limi-

tation constitutes a waiver of Section 16(b), and therefore is

void pursuant to Section 29(a) of the Exchange Act.

The conversion cap in this case provides that:

3.10 Purchaser Ownership of Common Stock. The Pur-

chaser may not use its ability to convert Shares hereunder

or under the terms of the Vote Certificates or to exercise

its right to acquire shares of common stock under the

Warrants to the extent that such conversion or exercise

would result in the Purchaser owning more than 4.9%

_ of the outstanding shares of the Common Stock. The

company shall, promptly upon its receipt of a Holder

Conversion Notice tendered by the Purchaser (or its sole

designee) under the Vote Certificates, and upon its re-

ceipt of a notice of exercise under the terms of any of

the Warrants, notify the Purchaser by telephone and by

facsimile of the number of shares of Common Stock

outstanding on such date and the number of Underlying

Shares and Warrant Shares which would be issuable to

the Purchaser (or its sole designee, as the case may be)

if the conversion requested in such Conversion Notice

or exercise requested in such exercise notice were ef-

fected in full, whereupon, notwithstanding anything to

the contrary set forth in the Vote Certificates or the

Warrants, the Purchaser may within one Trading Day of

its receipt of the Company notice required by this Sec-

tion by telephone or by facsimile revoke such conversion

or exercise to the extent that it determines that such con-

vei sion or exercise would result in the Purchaser owning

in excess of 4.9% of such outstanding shares of Common

Stock.

Joint App. at 36-37 (Convertibie Preferred Stock Agreement,

3.10) (emphasis added).

NL

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Relying on the permissive “may” in the above provision,

plaintiff-appellant argues that the Purchase Agreement is a

sham* because Southbrook can, in its sole discretion, decide

to own more than 4.9% of the common stock by simply not

revoking the relevant exercise or conversion. Southbrook re-

sponds that, to the contrary, the above provision ensures com-

pliance by permitting Southbrook to revoke any conversion

to the extent that it would result in Southbrook owning more

than 4.9% of ImmunoGen’s stock.

We reject plaintiff-appellant’s argument and instead agree

with defendant-appellee. “A writing is interpreted as a whole.”

Restatement (Second) of Contracts § 202(2). “The intention

of the parties is not derived from sentences or Clauses read in

isolation, but from the instrument as a whole.” Sure-Trip,

Inc. v. Westinghouse Engineering, 47 F.3d 526, 533 (2d Cir.

1995). On the whole, the conversion cap effectuates a clear

prohibition on Southbrook’s ability to convert shares to the

~ extent that conversion would result in it owning in excess of

4.9% of ImmunoGen’s outstanding common stock.

Additionally, the vote certificates provide that a conversion

notice, once given, is irrevocable. In light of that provision,

the clause relied on by plaintiff-appellant to prove that the

conversion cap is a sham is properly interpreted as an ex-

ception to the irrevocability provision providing a means of

ensuring compliance with the cap by granting Southbrook the

ability to revoke a requested conversion to the extent that full

exercise would exceed the cap. To separate the provisions of

Paragraph 3.10 from each other and the other documents that

constitute the parties’ agreement “in order to give them an

* “When the limitations provided by conversion caps are discovered to

be illusory or a sham, they should be disregarded and the courts should

analyze the case as though no such limitations existed.” Amicus at 25-26;

see also Bershad v. McDonough, 428 F.2d 693, 697 (7th Cir. 1970) (“[t}he

commercial substance of the transaction rather than its form must be con-

sidered, and courts should guard against sham transactions . . . .”),

A-14

assumed or [] abstract [] meaning, repugnant to their signifi-

cance in the contract, would be to destroy, and not to sustain

and enforce, the contract requirements,” and we decline to do

so. Bowers Hydraulic Dredging Co. v. United States, 211 U.S.

176, 188 (1908).

Additionally, plaintiff-appellant’s argument is defeated by

the fact that Southbrook may divest in order to stay under the

cap, and therefore, it does not have to revoke to remain in

compliance with the conversion cap.

Finally, we find plaintiff-appellant’s remaining arguments

to be without merit for substantially the same reasons as stated

by the district court.

Il. CONCLUSION

For the reasons set forth above, the judgment of the district

court is AFFIRMED.

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UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SDNY

MANDATE 99-cv-1480

Buchwald

At a stated Term of the United States Court of Appeals for

the Second Circuit, held at the United States Courthouse in the

City of New York, Foley Square, on the 23rd day of August,

two thousand and one.

: UNITED STATES

Basia? COURT OF APPEALS

Hon. Wilfred Feinberg, angen

Hon. Fred I. Parker,

aaa AUG 23 2001

Circuit Judges. R elt cihits Cie

Hon. Alfred V. Covello,” | **°8©4nn ©. MacKechnie, Cler

District Judge. SECOND CIRCUIT

Docket No. 00-7630

MARK LEVY, Derivatively on behalf of Immunogen Inc.,

Plaintiff-Appellant,

V.

SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.,

Defendant-Appellee.

— and —

IMMUNOGEN, INC.,

Nominal-Defendant-Appellee.

* The Honorable Alfred V. Covello, Chief Judge of the United States Dis-

trict Court for the District of Connecticut, sitting by designation.

A-16

Appeal from the United States District Court for the South-

ern District of New York.

This cause came on to be heard on the transcript of record

from the United States District Court for the Southern District

of New York and was argued by counsel.

On consideration whereof, it is now hereby ORDERED,

ADJUDGED and DECREED that the judgment of said district

court be and it hereby is AFFIRMED in accordance with the

opinion of this Court.

FOR THE COURT:

ROSEANN B. MACKECHNIE, Clerk

by: /s/ Arthur M. Heller

Arthur M. Heller

Administrative Attorney

A TRUE COPY

Roseann B. MacKechnie

by: /s/

DEPUTY CLERK

A-17

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

UNITED STATES COURT HOUSE

40 FOLEY SQUARE

NEW YORK 10007

ROSEANN B. MACKECHNIE

_ Clerk

DC: SDNY

DC Docket: 99-cv-1480

DC Judge: Buchwald

At a stated term of the United States Court of Appeals for

the Second Circuit, held at the United States Courthouse,

Foley Square, in the City of New York, on the 28th day of

November two thousand one.

MARK LEVY, Derivatively on behalf of Immunogen Inc.,

Plaintiff-Appellant,

v.

SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.,

Defendant-Appellee,

— and —

IMMUNOGEN, INC.,

Nominal-Defendant-Appellee.

dkt #: UNITED STATES

00-7630 COURT OF APPEALS

FILED

NOV 28 2001

Roseann B. MacKechnie, Clerk

SECOND CIRCUIT

A-18

A petition for panel rehearing and a petition for rehearing en

banc having been filed herein by the appellant Mark Levy

Upon consideration by the panel that decided the appeal,

it is Ordered that said petition for rehearing is DENIED.

It is further noted that the petition for rehearing en banc has

been transmitted to the judges for the court in regular active

service and to any other judge that heard the appeal and that

no such judge has requested that a vote be taken thereon.

FOR THE COURT:

ROSEANN B. MACKECHNIE, Clerk

by: /s/ Arthur Heller

Arthur Heller

Administrative Attorney

A-19

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

OPINION AND ORDER

99 Civ. 1480 (NRB)

MARK LEVY, derivatively on behalf of Immunogen, Inc.,

Plaintiff,

— against —

SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.,

Defendant,

4s and io

IMMUNOGEN, INC.,

Nominal Defendant.

NAOMI REICE BUCHWALD,

UNITED STATES DISTRICT JUDGE

Plaintiff Mark Levy (“Levy”), derivatively on behalf of Im-

munogen, Inc., brings this action for disgorgement pursuant

to Section 16(b) of the Securities and Exchange Act of 1934,

as amended, 15 U.S.C. § 78p(b) (“Exchange Act”), claiming

that Southbrook Intemational Investments, Ltd. (“Southbrook”)

improperly profited from its investment in ImmunoGen, Inc.

(“ImmunoGen” or the “Company”) by virtue of being a “bene-

ficial owner of more than 10%” of ImmunoGen’s common

stock. Compl. 4 16. Now pending is Southbrook’s motion to

dismiss, pursuant to Fed. R. Civ. P. 12(b)(6), for failure to state

a claim, on the ground that it was not a beneficial owner of that

amount. For the reasons set forth below, defendant’s motion

to dismiss is granted.

A-20

BACKGROUND

As this Opinion is addressed to defendants’ motion to dis-

miss, we rely exclusively on plaintiff's complaint for our reci-

tation of the following facts. On October 16, 1996, Southbrook

and ImmunoGen entered into a Convertible Preferred Stock

Purchase Agreement (“the Agreement”) by which Southbrook

acquired various series of ImmunoGen preferred stock, yield-

ing 9% per year, that were convertible into shares of common

stock, under varying conversion formulas. Compl. { 7. Plaintiff

asserts that, pursuant to the Agreement, Southbrook acquired

the right to own more than 10% of ImmunoGen common

stock, thereby beneficially owning that amount for purposes of

§ 16(b) short-swing trading liability, and proceeded to trade

in the Company’s stock. Compl. #f 11-19.

However, the same Agreement contains a provision that

prevents Southbrook from owning more than 4.9% of Im-

munoGen’s common stock at any time. The relevant provision,

article III, paragraph 3.10 (“the conversion cap”), reads as

follows:

3.10 Purchaser Ownership of Common Stock. The Pur-

chaser may not use its ability to convert Shares hereunder

or under the terms of the Vote Certificates or to exercise

its right to acquire shares of common stock under the

Warrants to the extent that such conversion or exercise

would result in the Purchaser owning more than 4.9% of

the outstanding shares of the Common Stock.

See Aff. of Kenneth Henderson (“Henderson Aff.”), dated Oct.

19, 1999, Ex. 2 (“Agreement”) at 13. Plaintiff does not in any

way assert that Southbrook ever violated the conversion cap,

but rather, that the cap did not prevent defendant from bene-

ficially owning more than 10% of Immunogen’s common

stock. See P1.’s Mem. at 7.

Plaintiff calculates that by February 21, 1997, Southbrook

had the right to acquire, by exercising its conversion rights

erisiteeneenesenenrenenerneetenntitieieniieiieiiiiiiiaiitaibiiiaiaaitaaiuidiliaad

A-21

under the Agreement, a total of 2,673,742 shares of Immuno-

Gen common stock, nearly 15% of the 17,933,328 shares then

outstanding. Compl. ¥ 11. Plaintiff claims, based on South-

brook’s ownership of convertible preferred stock, that between

January 1 and February 4, 1997, while beneficially owning

more than 10%, Southbrook acquired 1,384,823 common

shares by conversion, and then sold them presumably at a

profit. Jd. J 12. Southbrook allegedly repeated this process —

trading in ImmunoGen common stock while owning the right

to acquire more than 10% of it — between January 27, 1997

and August 4, 1997, and again in October 1997.' Jd 7 16, 17.

On December 28, 1998, plaintiff demanded that Immuno-

Gen’s Board of Directors bring an action to disgorge South-

brook of its alleged, sho ~swing profits. Compl. 4 21. By

letter dated February 18, 1999, the Board refused, and this

derivative suit followed. Compl. ¥ 22.

DISCUSSION

A. Fed. R. Civ. P. 12(6)(6) Standard

Dismissal of a complaint pursuant to Fed. R. Civ. P. 12(b)(6)

is warranted if “it appears beyond doubt that the plaintiff can

prove no set of facts in support of his claim which would

entitle him to relief.” See Cooper v. Parsky, 140 F.3d 433,

"A cursory reading of the complaint might lead the reader to believe that

Southbrook actually owned more than 10% of immunoGen’s outstanding

A-22

440 (2d Cir. 1998) (quoting Conley v. Gibson, 355 US. 41, 45-

46 (1957)). In ruling on.a Rule 12(b)(6) motion, a court is re-

quired “merely to assess the legal feasibility of the complaint,

not to assay the weight of the evidence which might be of-

fered in support thereof.” Geisler v. Petrocelli, 616 F.2d 636,

639 (2d Cir. 1980). Further, a court must accept all factual al-

legations in the complaint as true, and draw all inferences in

the plaintiff's favor. See Sheppard v. Beerman, 18 F.3d 147,

150 (2d Cir. 1994), cert. denied, 513 U.S. 816 (1994).

B. Section 16(b) of the Exchange Act

Section 16(b) of the Exchange Act provides that “a bene-

ficial owner of more than ten percent of any class of equity

security must turn over any profits earned, regardless of intent,

from a purchase and sale of the securities occurring within

six months.” Global Intellicom, Inc. v. Thomson Kernaghan

& Co., 1999 WL 544708, *13 (S.D.N.Y. July 27, 1999).? The

purpose of the statute is to “prevent[ ] the unfair use of infor-

mation” which such beneficial owners, as well as officers and

directors, are presumed to possess “by reason of [their] rela-

tionship to the issuer.” 15 U.S.C. § 78p(b). Nevertheless, be-

cause such presumptive insiders are subject to strict liability,

? Section 16(b) reads in pertinent part:

For the purpose of preventing the unfair use of information which

may have been obtained by such beneficial owner ... any profit

realized by him from any purchase and sale, or any sale and pur-

chase, of any equity security of such issuer . . . within any period of

less than six months ... shall inure to and be recoverable by the

issuer, irrespective of any intention on the part of such beneficial

owner ... in entering into such transaction or holding the security

purchased or of not repurchasing the security sold for a period

exceeding six months.

15 U.S.C. § 78p(b). “Such beneficial owner” refers to “every person who

is directly or indirectly the beneficial owner of more than 10 per centum

of any class of equity security” in Section 16(a). 15 U.S.C. § 78p(a). See

Global Intellicom, 1999 WL 544708, at *12 n.7.

A-23

regardless of their actual access to or use of inside informa-

tion, section 16(b) should be narrowly construed. See Gollust

v. Mendell, 501 U.S. 115, 122 (1991). Courts should avoid

“literal, ‘mechanical’ application of the Statutory text in de-

termining who may be subject to liability,” and should look

instead to the “evil that Congress sought to correct through

§ 16(b).” Jd. (quoting Reliance Electric Co. y. Emerson Elec-

tric Co., 404 U.S. 418, 425 (1972)).

“Beneficial ownership” for purposes of § 16(b) liability is

defined in § 13 of the Exchange Act and regulations promul-

gated thereunder. 17 C.F.R. § 240.16a-1(a). Specifically, Rule

13-d defines the “beneficial owner” of a security as:

Any person who, directly or indirectly, through any con-

tract, arrangement, understanding, relationship, or other-

wise has or shares:

(1) Voting power which includes the power to vote,

or to direct the voting of, such security; and/or

(2) Investment power which includes the power to

dispose, or to direct the disposition of such security.

17 C.F.R. § 240.13d-3(b).’ A provision of the Rule, central to

the facts of this case, further states that:

[a] person shall be deemed to be the beneficial owner of

a security ... if that person has the right to acquire

beneficial ownership of such security ... within sixty

days, including but not limited to any right to acquire:

(A) [t}hrough the exercise of any option, warrant or right;

[or] (B) through the conversion of a security; ...

17 CFR. § 240.13d-3(d)(1)(i).

~

* Levy concedes that because the convertible preferred shares it acquired

were non-voting, only the “investment power” prong of Rule 13d-3(a) is at

issue. See Pl.’s Mem. at 7.

a ii

A-24

C. Levy’s Theory of Beneficial Ownership

The issue to be decided on this motion is whether South-

brook, despite the existence of the conversion limitation of

4.9%, had the right to acquire voting or investment power

~ over more than 10% of ImmunoGen’s common stock within

60 days. Plaintiff's theory is that the conversion cap only

prevented Southbrook from owning more than 4.9% of Im-

munoGen’s common stock at any one time; the provision did

not prevent defendant from owning, in blocks of 4.9%, cumu-

latively more than 10%, at different times during a sixty day

period. See Pl.’s Mem. at 6-7 (alleging that Southbrook could

exceed the statutory threshold “by seriatim converting, sell-

ing and then converting its preferred stock into more shares

of the common stock”).* We reject plaintiff's theory for sev-

eral reasons.

First, contrary to plaintiff's contention that conversion caps

are invalid, see infra, several courts in the Second Circuit

have upheld conversion caps, such as the one present here, in

the context of § 16(b). See Levner v. Saud, 903 F. Supp. 452

(S.D.N.Y. 1994), aff'd, Levner v. Prince Alwaleed, 61 F.3d &

(2d Cir. 1995) (“Levner Ii”); Global Intellicom, 1999 WL

544708, at *16; but see Schaffer v. Capital Ventures Int’l, 98

Civ. 3900, slip op. (S.D.N.Y. Sept. 13, 1999). In Global Intel-

licom, a case involving the sale of convertible debentures, the

relevant agreement provided that: :

* We note, incidentally, that three separate transactions must take place in

order for defendant to actually own more than 10% of the issuer’s equity:

it would first have to convert preferred stock equivalent to 4.9% common

stock, at which point it would own 4.9% of the common stock and bene-

ficially own another 4.9% block of readily convertible preferred stock, a

total of only 9.8% (step 1); it would then have to sell some converted

common stock (step 2), because of the contractual limitation, in order to

pave the way for the final step, conversion of additional preferred stock

(step 3). Of course, the last transaction would result in a violation of the

- conversion cap.

A-25

[t]he Purchaser agrees not to convert Debentures ...

to the extent such conversion or exercise would result

in the Purchaser beneficially owning (as determined in

accordance with Section 13(d) of the Exchange Act and

the rules thereunder) in excess of 4.999% of the then

issued and outstanding shares of Common Stock . . .

Id. at 16. In dismissing both § 13(d) and § 16(b) claims against

the defendant, Judge Cote found that “this restriction is a suf-

ficient restraint such that [the defendant-purchaser] is not the

beneficial owner of more than 5% [of the issuer’s] common

stock.” Jd. As the Court reasoned, “holders of freely convert-

ible securities are generally deemed to be beneficial owners of

the underlying common stock. Where conversion rights are

limited, however, a holder of a convertible security may not

be deemed the beneficial owner of the underlying common

stock.” Id. at 15.°

Similarly in Levner, where an owner of 4.8% of Citicorp

common stock purchased convertible preferred stock equal to

an additional 10% common stock, Judge Preska relied in part

on a conversion cap of 10% in finding that the defendant was

not the beneficial owner of more than the cap amount. 903 F.

Supp. at 461. Narrowly construing § 16(b) and considering the

purpose and policy underlying the statute, the District Court

found that the preferred stock was not “presently convertible”

to more than 10% as a matter of law, and accordingly, the de-

fendant was not a beneficial owner of more than 10%. Jd. at

462. On appeal, the Second Circuit affirmed “the carefully

reasoned opinion of Judge Preska,” agreeing that the relevant

purchase agreement prevented the defendant from “convert-

[ing] his preferred shares in sufficient quantity, together with

* Plaintiff's effort to distiaguish Judge Cote’s decision based on that case’s

conversion cap’s specific reference to “beneficial ownership,” Pl.’s Mem. _

at 9 (emphasis added), is unavailing as it is clear that Judge Cote’s opinion

did not turn on that specific language.

A-26 :

the common shares he already held, to render him the bene-

ficial owner of more than 10 percent of Citicorp common

stock.” Levner IT, 61 F.3d at 9.

Second, based on our independent analysis of Rule 13-d’s

provisions, we reject plaintiff's theory of beneficial ownership.

Reading the Rule within the broader statutory framework, it

is clear that only those holders of derivative securities, who

could acquire ownership, by conversion or otherwise, of more

than 10% of the common stock, at one time, are subject to

§ 16(b) liability. Notwithstanding the extremely strained inter-

pretation of Rule 13d-3(1){i) that plaintiff asks this Court to

adopt,° we believe Congress intended to impose presumptive

insider status and strict liability only under those circum-

stances. See, e.g., Morales v. Freund, 163 F.3d 763, 766 (2nd

Cir. 1999) (“core object of § 16(b) [is] the avoidance of

short-swing profit[s] by investors who trade in stocks whose

value they may be able to influence”). Thus we note, once

again, that Southbrook was restricted by the Agreement’s con-

version cap from owning more than 4.9% of the outstanding

common stock, at any one time, and thus was never a bene-

ficial owner of more than the triggering amount.

Third, we consider plaintiff's theory to be extremely far

reaching and overly broad. Taken to its logical extreme, the

theory would seem to reach virtually any person who has the

capacity (i.e., wherewithal) to successively purchase and sell

sufficient quantities of stock in a relatively short period of

time. One might imagine a wealthy speculator who buys 1%

* According to plaintiff's construction, the “Agreement only prevented

Southbrook from owning more than 4.9% of [common stock] at any one

time. However, Rule 13d-3(1){i) . . . speaks in terms of the shares which

could be acquired within sixty days. As such, the particular number of

shares of common stock owned on any one day is irrelevant to the analy-

sis of determining the beneficial ownership for purposes of Section 16(b).”

Pl.’s Mem. at 7 (emphasis in original). We simply cannot accept plaintiff's

suggestion that the number of shares a person could own at a single time

is irrelevant.

CC ee

A-27

of a company’s common stock (or an equivalent amount of

derivative securities), sells it shortly thereafter for a profit,

and repeats this process ten or more times over a period of

sixty days. Under plaintiff's theory, the person’s mere ability

to acquire more than 10% at different times within sixty days,

while never resulting in his owning 10% at one time, would

make him the beneficial owner of more than 10%. However,

our confidence that § 16(b) was not intended to reach this hypo-

thetical investor, causes us to be wary of plaintiff's theory,

since if accepted, it would extend the statute’s sweep beyond

those with insider power and information.

In sum, plaintiff's argument as to beneficial ownership fails

because it is inconsistent with clear precedent in this Circuit,

requires an improperly broad construction of § 16(b) and its

accompanying regulations, and would not serve the statute’s

underlying purposes. Accordingly, we find that in the absence

of a violation of the conversion cap, Southbrook did not bene-

ficially own more than 4.9% of ImmunoGen’s common stock.

D. Conversion Cap is Valid aud Enforceable

Alternatively, Levy argues that the Agreement’s conversion

cap, J 3.10, is void and unenforceable pursuant to (1) the sham

transaction doctrine, (2) Rule 13d-3(b), and (3) § 29(a) of the

Exchange Act. See Pl.’s Mem. at 10-19. These arguments are

without merit. First, the sham transaction doctrine, see Ber-

shad v. McDonough, 428 F.2d 693, 697 (7th Cir. 1970), cert.

denied, 400 U.S. 992 (1971) (“[t]he commercial substance of

the transaction rather than its form, -must be considered, and

the courts should guard against sham transactions. . .”), 1s in-

applicable here, given that conversion caps have been upheld

as a legitimate means of structuring a transaction to avoid

§ 16(b) liability. See Global Intellicom, 1999 WL 544708, at

*1; see also Reliance, 404 U.S. at 422 (“liability cannot be im-

posed simply because the investor structured his transaction

with the intent of avoiding liability under Section 16(b)”).

A-28

Plaintiff's argument under Rule 13d-3(b),’ which prohibits

“contract[s], arrangement{s] or device[s]” that are “part of a

plan or scheme to evade the [applicable] reporting require-

ments,” similarly fails as there is no factual basis to support

the existence of such a plan or scheme to evade, here. There

is no allegation in plaintiff's complaint that Southbrook failed

to disclose any aspects of the ImmunoGen transaction in

applicable regulatory filings, or that defendant ever attempted

to conceal any matter for the purpose of avoiding its report-

ing obligations.

Finally, plaintiff's § 29(a) argument, raised for the first time

in plaintiff's opposition brief, also fails, as the statute applies

only to parties’ express waivers of non-compliance with the

securities laws. No such waiver is pled here. Rather, the parties

entered into a transaction that has been specifically sanc-

tioned by the courts under the securities laws.

Accordingly, plaintiffs contentions, that the conversion cap

present here is invalid and unenforceable, fail.

7 Rule 13d-3(b), 17 C.F.R. § 240.13d-3(b), states, in relevant part:

Any person who, directly or indirectly, creates or uses a... con-

tract, arrangement or device with the purpose or effect of divesting

such person of beneficial ownership of a security or preventing the

vesting of such beneficial ownership as part of a plan or scheme

to evade the reporting requirements of section 13(d) ... shall te

deemed for purposes of such Sections to be the beneficial owner of

such security.

A-29

CONCLUSION

For the foregoing reasons, defendant’s motion to dismiss is

granted, and plaintiff's complaint is dismissed. The Clerk of

the Court is directed to close the above Captioned case.

IT IS SO ORDERED.

DATED: New York, New York

May 8, 2000

/s/ Naomi Reice Buchwald

NAOMI REICE BUCHWALD

UNITED STATES DISTRICT JUDGE

Jeffrey S. Abraham, Esq.

Law Offices of Jeffrey S. Abraham

60 East 42nd Street, Suite 4700

New York, New York 10165

Mitchell M.Z. Twersky, Esq.

Fruchter & Twersky

60 East 42nd Street, Suite 4700

New York, New York 10165

Herbert Teitelbaum, Esq.

Robinson Silverman Pearce Aronsohn & Berman LLP

1290 Avenue of the Americas

New York, New York 10104

A-30

TITLE 15. COMMERCE AND TRADE

CHAPTER 2B. SECURITIES EXCHANGES

15 USCS § 78p (2001)

. § 78p. Directors, officers, and principal stockholders

(a) Filing of statement of all ownership of securities of

issuer by owner of more than ten per centum of any class of

security. Every person who is directly or indirectly the bene-

ficial owner of more than 10 per centum of any class of any

equity security (other than an exempted security) which is reg-

istered pursuant to section 12 of this title [15 USCS § 781], or

who is a director or an officer of the issuer of such security,

shall file, at the time of the registration of such security on a

national securities exchange or by the effective date of a reg-

istration statement filed pursuant to section 12(g) of this title

[15 USCS § 781(g)], or within ten days after he becomes such

beneficial owner, director, or officer, a statement with the

Commission (and, if such security is registered on a national

securities exchange, also with the exchange) of the amount

of all equity securities of such issuer of which he is the

beneficial owner, and within ten days after the close of each

calendar month thereafter, if there has been a change in such

ownership or if such person shall have purchased or sold a

security-based swap agreement (as defined in section 206B

of the Gramm-Leach-Bliley Act [15 USCS § 78c note]) in-

volving such equity security during such month, shall file with

the Commission (and if such security is registered on a na-

tional securities exchange, shall also file with the exchange),

a statement indicating his ownership at the close of the cal-

endar month and such changes in his ownership and such

purchases and sales of such security-based swap agreements

as have occurred during such calendar month.

(b) Profits from purchase and sale of security within six

months. For the purpose of preventing the unfair use of infor-

mation which may have been obtained by such beneficial

owner, director, or officer by reason of his relationship to the

‘A-31

issuer, any profit realized by him from any purchase and sale,

or any sale and purchase, of any equity security of such issuer

(other than an exempted security) or a security-based swap

agreement (as defined in section 206B of the Gramm-Leach-

Bliley Act [15 USCS § 78c note]) involving any such equity

security within any period of less than six months, unless such

security or security-based swap agreement was acquired in

good faith in connection with a debt previously contracted,

shall inure to and be recoverable by the issuer, irrespective of

any intention on the part of such beneficial owner, director,

or officer in entering into such transaction of holding the se-

curity or security-based swap agreement purchased or of not

repurchasing the security or security-based swap agreement

sold for a period exceeding six months. Suit to recover such

profit may be instituted at law or in equity in any court of

competent jurisdiction by the issuer, or by the owner of any

security of the issuer in the name and in behalf of the issuer if

the issuer shall fail or refuse to bring such suit within sixty

days after request or shall fail diligently to prosecute the same

thereafter; but no such suit shall be brought more than two

years after the date such profit was realized. This subsection

shall not be construed to cover any transaction where such

beneficial owner was not such both at the time of the pur-

chase and sale, or the sale and purchase, of the security or

security-based swap agreement (as defined in section 206B of

the Gramm-Leach-Bliley Act [15 USCS § 78c note]) involved,

or any transaction or transactions which the Commission by

tules and regulations may exempt as not comprehended within

the purpose of this subsection.

ene NANTON Fe ee nl eT MIO ER Re ET EA

A-32

TITLE 15. COMMERCE AND TRADE

CHAPTER 2B. SECURITIES EXCHANGES

15 USCS § 78c (2001)

§ 78c. Definitions and application

(b) Power to define technical, trade, accounting, and other

terms. The Commission and the Board of Governors of the

Federal Reserve System, as to matters within their respective

jurisdictions, shall have power by rules and regulations to de-

fine technical, trade, accounting, and other terms used in this

title, consistently with the provisions and purposes of this title.

TITLE 15. COMMERCE AND TRADE

| CHAPTER 2B. SECURITIES EXCHANGES

15 USCS § 78cc (2001)

- § 78cc. Validity of contracts

(a) Waiver provisions. Any condition, stipulation, or provi-

sion binding any person to waive compliance with any pro-

vision of this title or of any rule or regulat»s~ shereunder, or

of any rule of an exchange required thereby snail be void.

~~

A-33

TITLE 17— COMMODITY AND -

SECURITIES EXCHANGES

CHAPTER II — SECURITIES AND

EXCHANGE COMMISSION

PART 240 — GENERAL RULES AND REGULATIONS,

SECURITIES EXCHANGE ACT OF 1934

SUBPART A — RULES AND REGULATIONS UNDER

THE SECURITIES EXCHANGE ACT OF 1934

REPORTS OF DIRECTORS, OFFICERS,

AND PRINCIPAL SHAREHOLDERS

17 CFR 240.16a-1

§ 240.16a-1 Definition of Terms.

Terms defined in this rule shall apply solely to section 16

of the Act and the rules thereunder. These terms shall not be

limited to section 16(a) of the Act but also shall apply to ail

other subsections under section 16 of the Act.

(a) The term beneficial owner shall have the following ap-

plications:

(1) Solely for purposes of determining whether a person is

a beneficial owner of more than ten percent of any class of

equity securities registered pursuant to section 12 of the Act,

the term “beneficial owner” shall mean any person who is

deemed a beneficial owner pursuant to section 13(d) of the Act

and the rules thereunder; provided, however, that the follow-

ing institutions or persons shall not be deemed the beneficial

owner of securities of such class held for the benefit of third

parties or in customer or fiduciary accounts in the ordinary

course of business (or in the case of an employee benefit plan

specified in paragraph (a)(1)(vi) of this section, of securities

of such class allocated to plan participants where participants

have voting power) as long as such shares are acquired by

such institutions or persons without the purpose or effect of

A-34

changing or influencing control of the issuer or engaging in

any arrangement subject to Rule 13d-3(b) (§ 240.13d-3(b)):

(i) A broker or dealer registered under section 15 of the

Act (15 U.S.C. 780);

(ii) A bank as defined in section 3(a)(6) of the Act (15

U.S.C. 78c);

(iii) An insurance company as defined in section 3(a)(19)

of the Act (15 U.S.C. 78c);

(iv) An investment company registered under section 8 of

the Investment Company Act of 1940 (15 U.S.C. 80a-8);

(v) Any person registered as an investment adviser under

Section 203 of the Investment Advisers Act of 1940 (15

~ U.S.C. 80b-3) or under the laws of any state;

(vi) An employee benefit plan as defined in Section 3(3)

of the Employee Retirement Income Security Act of 1974, as

amended, 29 U.S.C. 1001 et seg. (“ERISA”) that is subject to

the provisions of ERISA, or any such plan that is not subject

to ERISA that is maintained primarily for the benefit of the

employees of a state or local government or instrumentality,

or an endowment fund;

(vii) A parent holding company or control person, provided

the aggregate amount held directly by the parent or control

person, and directly and indirectly by their subsidiaries or af-

filiates that are not persons specified in paragraphs (a)(1)(i)

through (ix), does not exceed one percent of the securities of

the subject class;

(viii) A savings association as defined in Section 3(b) of

the Federal Deposit Insurance Act (12 U.S.C. 1813);

(ix) A church plan that is excluded from the definition of

an investment company under section 3(c)(14) of the Invest-

ment Company Act of 1940 (15 U.S.C. 80a-3); and

A-35

(x) A group, provided that all the members are persons

specified in § 240.16a-1(a)(1)(i) through (ix).

(xi) A group, provided that all the members are persons

specified in § 240.16a-1(a)(1) (i) through (vii). -

NOTE TO PARAGRAPH (A). Pursuant to this section, a

person deemed a beneficial owner of more than ten percent of

any class of equity securities registered under section 12 of the

Act would file a Form 3 (§ 249.103), but the securities holdings

disclosed on Form 3, and changes in beneficial ownership re-

ported on subsequent Forms 4 (§ 249.104) or 5 (§ 249.105),

would be determined by the definition of “beneficial owner”

in paragraph (a)(2) of this section.

A-36

TITLE 17 — COMMODITY AND

SECURITIES EXCHANGES

CHAPTER II — SECURITIES AND

EXCHANGE COMMISSION

PART 240 — GENERAL RULES AND REGULATIONS,

SECURITIES EXCHANGE ACT OF 1934

SUBPART A — RULES AND REGULATIONS UNDER

THE SECURITIES EXCHANGE ACT OF 1934

REGULATION 13D

17 CFR 240.13d-3

§ 240.13d-3 Determination of beneficial owner.

(a) For the purposes of sections 13(d) and 13(g) of the Act

a beneficial owner of a security includes any person who, di-

rectly or indirectly, through any contract, arrangement, under-

standing, relationship, or otherwise has or shares:

- (1) Voting power which includes the power to vote, or to

direct the voting of, such security; and/or,

(2) Investment power which includes the power to dispose,

or to direct the disposition of, such security.

(b) Any person who, directly or indirectly, creates or uses

a trust, proxy, power of attorney, pooling arrangement or any

other contract, arrangement, or device with the purpose of

effect of divesting such person of beneficial ownership of

a security or preventing the vesting of such beneficial owner-

ship as part of a plan or scheme to evade the reporting require-

ments of section 13(d) or (g) of the Act shall be deemed for

purposes of such sections to be the beneficial owxer of such

security.

(c) All securities of the same class beneficially owned by

a person, regardless of the form which such beneficial owner-

A-37

ship takes, shall be aggregated in calculating the number of

shares beneficially owned by such person.

(d) Notwithstanding the provisions of paragraphs (a) and

(c) of this rule:

(1)() A person shall be deemed to be the beneficial owner

of a security, subject to the provisions of paragraph (b) of this

tule, if that person has the right to acquire beneficial owner-

ship of such security, as defined in Rule 13d-3(a) (§ 240.13d-

3(a)) within sixty days, including but not limited to any right

to acquire: (A) Through the exercise of any option, warrant

or right; (B) through the conversion of a security; (C) pur-

suant to the power to revoke a trust, discretionary account, or

similar arrangement; or (D) pursuant to the automatic termin-

ation of a trust, discretionary account or similar arrangement;

provided, however, any person who acquires a security or

power specified in paragraphs (d)(1)(i)(A), (B) or (C), of this

section, with the purpose or effect of changing or influencing

the control of the issuer, or in connection with or as a partici-

pant in any transaction having such purpose or effect, im-

mediately upon such acquisition shall be deemed to be the

beneficial owner of the securities which may be acquired

through the exercise or conversion of such security or power.

Any securities not outstanding which are subject to such op-

tions, warrants, rights or conversion privileges shall be deemed

to be outstanding for the purpose of computing the percentage

of outstanding securities of the class owned by such person

but shall not be deemed to be outstanding for the purpose of

computing the percentage of the class by any other person.